Ben Butler and Henrietta Cook

In its annual report the VFMC revealed that on behalf of its government clients it held debt securities over the hospital project worth $1.12 billion.

The former Labor government of Victoria used taxpayers' money to finance the ongoing $1 billion Royal Children's Hospital redevelopment despite billing it as privately funded, Fairfax Media has learnt.

The Liberal Treasurer, Michael O'Brien, said a billion-dollar bond funding deal was struck in 2007 by government-owned investment company the Victorian Funds Management Corporation.

The bonds are now under pressure, with ratings agency Standard & Poor's recently downgrading some to ''junk'' on fears the hospital will have to slash rents.

''This was an arrangement entered into in 2007 by the former VFMC management and under the former Labor government,'' Mr O'Brien said.

In its annual report, tabled in October, the VFMC revealed that on behalf of its government clients it held debt securities over the hospital project worth $1.12 billion.

The disclosure contradicts a statement on the Royal Children's Hospital website that the private sector ''will finance'' the new hospital building.

VFMC is responsible for investing $41 billion on behalf of government bodies including the super fund for paramedics and police, ESSSuper, the Transport Accident Commission, and the National Gallery of Victoria.

The Auditor-General's office said that the VFMC's 2011-12 statement was in line with financial reporting rules and there was no requirement to disclose related parties in Victorian public-private partnerships.

A spokeswoman said that the information about the Royal Children's Hospital disclosed in the corporation's latest annual report was ''over and above requirements''.

Mr O'Brien said that in 2012 the Coalition government decided ''that a more transparent approach for disclosing this VFMC investment was required, consistent with our broader reforms aimed at improving the VFMC's governance and investment approval processes''.

''While it is not a technical requirement for the VFMC to report publicly on this specific investment, we determined it was in the best interests of Victorian taxpayers to do so,'' he said. Former treasurer John Lenders said that ''any suggestion that the VFMC was directed to prop up a PPP is just nonsense''.

''I have no recollection of the VFMC being involved,'' he said.

Opposition Leader Daniel Andrews could not be reached.

VFMC company secretary Kerrie Howard said the board and management of the VFMC had changed since the deal was done in 2007.

Chief investment officer Leo de Bever resigned in 2008 and chief executive Syd Bone followed suit the following year after VFMC declared a multibillion-dollar loss.